The Accounting Period Cycle & Concepts

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Transcript of The Accounting Period Cycle & Concepts

Step 6Eleven commonly accepted concepts are used in the finance profession as a guideline for reporting and interpreting accounting information.~Overview~The Accounting Period Cycle & ConceptsImportance: Adjusting entries are used to update the journal and closing entries close out temporary accounts for the start of a new fiscal period (Gilbertson 206).Driving Question:How does the Accounting Period Cycle and GAAP Concepts impact Accounting?Discussed ConceptsAccounting Period CycleAdequate DisclosureBusiness Entity Consistent ReportingGoing ConcernHistorical cost

Objectives of PresentationGoalsIdentify and describe how the accounting principles impact financial statements.Order and describe each accounting step.Integrate the above two concepts into one overall presentation in an easily understood manor.Accounting Period Cycle: changes in financial information are reported for a specific period of time in the form of financial statementsAdequate Disclosure: financial statements contain all information necessary to understand a business' financial conditionBusiness Entity: financial information is recorded and reported separately from the owner's personal financial informationConsistent Reporting: the same accounting procedures must be followed in the same way each timeGoing Concern: financial statements are prepared with the expectation that a business will remain in operation indefinitelyHistorical Cost: The actual amount paid for merchandise or other items bought is recordedMatching Expenses with Revenue: the revenue from business activities and the expenses associated with earning that revenue are recorded in the same accounting periodObjective Evidence: A source document is prepared for each transactionRealization of Revenue: Revenue is recorded at the time goods or services are soldMateriality: business activities creating dollar amounts large enough to affect business decisions should be recorded and reported as separate items in accounting items in accounting records and financial statementsUnit of Measurement: business transactions are reported in numbers that have common values - that is, using a common unit of measurementStep 1Analyze Transactions(Gilbertson A1-A3)Unit of Measurement & Business EntityTo begin, a transaction must occur to change a business's asset, liability and/or owners equity account. These transactions are stated in common values. For example, in the United States, business transactions occur via dollar amounts [Concept: Unit of Measurement]. The concept is followed so that the financial reports of a business can be clearly stated and understood in numbers that have comparable values (Gilbertson 10). Additionally, in a business, these transactions should not include personal records of the owner(s) (Gilbertson 10). [Concept: Business Entity]Personal RecordsCommon Source DocumentsChecks: orders cash from a bank accountSales Invoice: a sale which cash is to be received at a later dateReceipt: written acknowledgment for cash receivedMemorandum: brief message describing a transactionCalculator Tapes: total of daily cash received from customers

Owners Equity(OE): the amount remaining after all values of liabilities is subtracted from the value of all assetsthe equation must be in balance i.e 5A = 2L + 3OE; 5=5Before a business starts the equation is: 0A= 0L + 0OE; 0=0

(Gilbertson 8)Key TermsT Account: an accounting device used to analyze transactionsDebit: an amount recorded on the left sideCredit: an amount recorded on the right sideNormal Balance(NB): the side that is increasedChart of Accounts: a list of accounts used by a businessAny AssetNBAny LiabilityNBOwner's Equity T-Accounts:"Any" ExpenseNB"Name" DrawingNB"Name" CapitalNBSales (Revenue)NB2. Then, identify the account associated with the transaction. There will always be two accounts affected in every transaction. These two accounts can be a combination of an asset and an asset, a liability and an asset, an expense and an asset, etc... Every account has a t-account showing debits, credits and a normal balance. Depending on the account, the debit will increase and the credit will decrease and vice versa. *All T-AccountsLeft side= DebitRight side=CreditNB= Normal BalanceNB side always increasesExample: Analyzing a Transaction(Gilbertson 28-32)Received cash from owner (Kelly) as an investment, $500.Accounts used: Cash (an asset) and Kelly, Capital (owner's equity) CashNBKelly, CapitalNB Assets = Liabilities + Owners Equity Any LiabilityNBHow the accounts are affected- Cash is increased; Kelly, capital is decreased CashAny LiabilityKelly, Capital500 00 00 500500 + 0 = 500500 = 500^ These must equal! Importance: By correctly analyzing transactions into their proper debit/credit parts, you have completed the first step in the accounting cycle. This step is critical to start journalyzing.Step 2

Key TermsJournal: a form for recording transactions in chronological orderJournalizing: the act of recording transactions in a journalSpecial Amount Column: a journal amount column headed with an account titleGeneral Amount Column: a journal amount column not headed with an account titleEntry: information for each transaction recorded in a journalDouble-Entry Accounting: the recording of debit/credit parts of a transactionSource Document: a business paper which information is obtained for a journal entry(Gilbertson 56-57)Recording Document Numbers (Abbreviations):Check- C{check #} ex. check 367= C367Memorandum- M{memo #} i.e. Memorandum 36= M36Calculator Tape- T{date #} ex. Aug. 12 Tape #12= T12Sales Invoice- S{invoice #} ex. Sales invoice #1= S1Receipt- R{receipt #} ex. Receipt #9= R9Steps to Journalizing1. Determine which journal you will use for each entry.(Reminder: entries are to be done chronologically)3. Record the year directly under the column heading Date and the month/day in the first entry spot.Journal PossibilitiesEach business uses the kind of journal that best fits the needs of that business. The nature of a business and the number of transactions to be recorded determine the kind of journal to be used (Gilbertson 56).***Go to next slide for more information on the different types of journals.Specific to larger businesses (ex. merchandising business):Special Journal: a journal used to record only one kind of transactionCash payments Journal: for all cash paymentsPurchases Journal: for all purchases of merchandise on accountSales Journal: for all sales of merchandise on accountCash Receipts Journal: for all cash receiptsGeneral Journal: for all other transactions(Gilbertson 235)Specific to a smaller businesses (ex. a proprietorship):Smaller businesses often use a multicolumn journal that have five amount columns: General debit/credit, Sales credit, and Cash debit/credit. All entries are made in a single journal.

(Gilbertson 57)4. Record the debit amount under an appropriate column heading. If the debit amount does not belong to a special amount column, then the amount is to be recorded in the general amount column along with its account title. In addition, the name of the account should be written under the Account Title column in it's corresponding entry row.Steps to Journalizing Cont.5. Record the credit amount under the a proper column heading. If the amount does not belong to a special amount column. Then, place the amount under the general amount column along with it's corresponding account title (similar to that in step 3)6. Record the source document from which you obtained the information under the column row titled Doc. No.. 2. Record the journal page number in the top right hand corner (always).[Concept: Objective Evidence]**Reminders: Debits must be recorded first!If a transaction contains a general column amount and a special column amount then, the entry can be combined in one row.If a transaction contains two special amount columns (ex. received cash from sales), then the entry can be combined in one row. In addition, a check mark is placed in the general account title and post reference columns. The check mark will be explained in a later step.If a transaction contains two general column amounts, then the entry must be created on two separate rows.

Steps to Journalizing Cont.**Reminder: Once the year and month is recorded once, you do not need to continuously record it unless a change in month occurs. The day is recorded with each new entryExample (Proprietorship)2013Dec.1December 1. Received cash from owner (Kelly) as an investment, $100.00. Receipt No. 1. 2. Bough supplies on account from Walmart, $20.00. Memorandum No. 1 3. Received cash from sales, $500.00. Tape No. 3.4. Paid cash on account to Walmart, $5.00.Check No. 7.Rule and prove pageKelly, CapitalR110000100002SuppliesAccounts Payable- Walmart20002000M13T35000050000DateJournal Page #Source DocumentSingle & Double Rule4Accounts Payable- WalmartC72000500500120 00500 00600 00-----Proving Page 2 Debit CreditGen.: $25.00 120.00Sales: 500.00 Cash: $600.00 5.00Totals $625.00 = 625.00 Carried Forward332013Dec.Brought Forward-----600 00500 001 20 0020002500120005000060000500Single & Double Rule31TotalsProving Page 1 Debit CreditGen.: $20.00 120.00Sales: 500.00 Cash: $600.00 0.00Totals $620.00 = 620.00 General Account TitleSpecial Amount Column: Sales CreditGeneral Amount Column n Debit/CreditCash Debit/CreditSteps to Journalizing Cont.7. Proving and Ruling a Journal Pagei. Begin by drawing a single line directly below the last entry of the journal. This line indicates that the columns are to be totaled.ii. On the next available row, write the date in the date column (reference below).(Situation A) If it's the last line of a particular page, but there are still other journal entries to be recorded, then use the date in the last entry (Situation B) If there are no more journal entries needed to be recorded, then the date should be the last day of the most recent month.iii. To total or carry forward?If you're in situation A, write "Carried Forward" in the account title column and place a check mark in the Post. Ref. column. If you're in situation B, write "Totals" in the account title columniv. Regardless if you're in situation A or B, your next step is to add up each column, and write the column totals underneath the single line rule in it's corresponding column

Journal Page #Column TotalsColumn TotalsGeneral Amount Column n Debit/CreditSpecial Amount Column: Sales CreditCash Debit/CreditPost Reference(Gilbertson 74-75)Importance: Journalizing is a permanent record of the debit/credit parts of every transaction within a business in chronological order.Step 3JournalizingPostingImportance: Posting enables an accountant to see all the changes occurring in a single account.Basic Key TermsLedger: a group of accountsTypes of ledgers include..General ledgersSubsidiary ledgersAccounts payable ledgersAccounts receivable ledgersAccount Number: the number assigned to an accountPosting: transferring information from a journal entry to a ledger accountChart of Accounts: a list of account titles and numbers showing the location of each account in a general ledge

Creating a Chart of Accounts( Gilbertson 91-96){Account Name}{# of selected account}{Year}{Month}{Day}{Notes}Journal Type & Page #How the account is affected;Debit/CreditThe result of the transaction on the overall accountAn Account Form Accounts in a general ledger are arranged in the same order as they appear on financial statements (Gilbertson 92).assets-> liabilities-> owner's equity-> revenue-> and expensesThe most common number system is:Asset accounts: 1,000 to 1,999Liability accounts: 2,000 to 2,999Equity accounts: 3,000 to 3,999Revenue: 4,000 to 4,999Expense accounts: 5,000 to 6,999When assigning numbers to your accounts, it's important to assign in increments (ex. 1000, 1100, 1200). This allows room for more accounts to be added in the future if need be.When an account is no longer needed, it is removed from the ledger and the chart of accounts (Gilbertson 93).(How)Example of ChartNotes:When setting up a chart of accounts, asset, liability, and owners equity accounts are always to the left, and any revenue or expense accounts are always to the right. Each section is labeled prior to the accounts associated with each.ex. (100) Assets, (200) Liabilities), (300) Owner's Equity, (400) Revenue, and (500) ExpensesAssets, Liabilities & Owner Equity Accounts (Right)Revenue & Expense Accounts (Left)Steps to Posting*NoteIf you have multiple types of journal pages, be sure to post in the following order: sales journal, purchases journal, general journal, cash receipts journal, and finally, cash payments journal.The check marks you placed while journalizing means the amounts are NOT to be posted individually. You can skip these. Requirements1. Identify the steps of the accounting cycle.2. Explain and report the significance of each step.3. Identify and explain the accounting concepts involved at each step.4. Show examples of each step.5. Use MLA format when presenting information.Example:1. Begin by opening a ledger for each individual account. To open an account, write the account title and it's associated number (from chart of accounts) on the blank ledger.2. Place any previous balances associated with the account in its appropriate ledger account. Be sure to record this number in the balance column under the debit/credit normal balance. Then, place a check mark in the Post. Ref. column.3. With your pages in the order mentioned above, begin with the first journal entry. Look at the account title and then, find the ledger that has the same title.4. On the ledger, record he date (month/day/year) in the Date

column.5. Write the journal type and page number in the Post. Ref. column of the ledger. 6. Record any debit/credit amounts associated with the journal entry your posting in the debit/credit columns prior to the balance columns.7. Record the new account balance in the balance column debit/credit normal balance.a debit on a debit or a credit on a credit; add.a debit on a credit or a credit on a debit; subtract. 8. Go back to the journal and write the account number (found on top right of ledger) in the Post. Ref. column of the journal.9. Repeat until all general accounts are posted from all journals.10. Place a check mark under the general debit and credit columns totals of the journal. This check mark indicates that the column totals are not to be posted individually. (Gilbertson 100).11. Following the same order of pages as posting entries individually begin with the first special amount column total. Find the ledger associated with the special amount column title. 12. Follow the same steps as posting individually, recording only the column totals. 13. Once a special amount column is recorded, place the ledger account number underneath the column total in a parenthesis. **remember to update debit/credit balance columns as you go!Steps to Posting Cont.Step 4Preparing a Worksheet Importance:1. to summarize general ledger account balances to prove that debits equal credits2. to plan needed changes to general ledger accounts to bring account balances up to date3. separate general ledger account balances acording to the financial statements to be prepared4. to calculate the amount of net income or net loss(Gilbertson 96-105)(Gilbertson 152)Example of Posting:Kelly, Capital2013Dec. 11100 00100 00Supplies2013Dec. 2120 002000Accounts Payable - Walmart2013Dec. 220 0020 001Sales425001 5 002013Dec. 312500 00500 00Cash2013Dec. 312312600 00600 0050059500110120210410310310120210210(410)(110) (110)Steps in Preparing a worksheet1. To begin, complete the heading of the worksheet highlighted above.2. Enter the account balances in the trial balance column.This is done by directly copying the account titles and ending balance from previous ledgers.3. Enter any adjustments in the adjustment columns (excluding federal income tax expense and federal income tax payable at this point).A letter corresponds with each debit/credit entry and is placed in parenthesis to the left of each value.4. Extend up-to-date accounts to the balance sheet column. Assets and liabilities, as well as capital and drawings accounts, are extended to the balance sheet columns (with the exception of the federal income tax payable account).5. Extend all up-to-date income statement account balances(Excluding the federal income tax expense).The resulting accounts that do not go to the balance sheet columns go to the income statement columns.{Company's Name}WorksheetFor Month Ended, {Month day, year}Steps in Preparing a Worksheet Cont.6. At this point in time, you can now calculate the federal income tax expense adjustment. Steps in Preparing a Worksheet Cont.Begin by adding the Income Statement Debit and Credit columns and then find the difference between the two. Income Statement Credit column total - Income Statement Debit column total = Net Income before Federal Income TaxExample: $130,000(Income Statement Credit column total) - $20,000(Income Statement Debit column total) = $110,000(Net Income before Federal Income Tax)Using the chart illustrated below, calculate the actual amount owed. Ex. The figures come from the example above. Given information: Trial Balance Federal Income Tax Expense= $20,000Federal Income TaxFirst $50,000.00.......................................................Next, 25,000.00.........................................................Next, $25,000.00.......................................................___________ - $100,000.00=__________......Total Federal Income TaxRate15%25%34%39%Tax_______________________________________________________$7,500.00$6,250.00$8,500.00Calculation for adjustment:$110,000.00 $10,000.00$3,900.00+$26,150.00This amount is the difference between income statement credit and debit (calculated above).Actual amount owed (calculated using chart) - Trial Balance Federal Income Tax Expense = Adjustment$26,150.00- $20,000 = $6,150.00 <--adjustmentTreat this adjustment as you would with any other adjustment; debit Federal Income Tax Expense and credit Federal Income Tax Payable. Now, you can transfer these two accounts to their corresponding columns after adjustment calculations have been made. The Federal Income Statement Payable account will extend to the balance sheet column, and the Federal Income Tax Expense will extend to the Income Statement column.6 (Cont.) Place a single rule under the Trial Balance Debit and Credit columns and add these columns separately. (The Debit and Credit column totals must equal!) Place these totals under their corresponding debit and credit column. If they are equal, place a double rule under each total.8. Calculate and record the net income or net loss.Place a single rule under the Income Statement and Balance Sheet columns and add up each Debit and Credit column. Then, place these totals under the single rule line under each column title respectfully. These four totals will not equal!In the Income Summary column, subtract the smaller total from the larger total and place the difference under the smaller total. Do the same for the Balance Sheet Debit and Credit columns.In the occurrence of a net income, these differences will lye on the outer portions of the four columns. Meanwhile, the differences in a net loss will lye in the middle two columns. Regardless where these differences are put, they must equal!The, label the row (in the Account Title column) as a Net Income or a Net Loss varying on your situation9. Place a single line below the Net Income or Net Loss amounts. Add the Net Income or NetLoss amounts to the column totals above. Place totals under the Net Income or Net Loss amounts. These totals must match! Once the Balance Sheet Debits and Credits match, rule double lines underneath the final totals. The same is done for the Income Statement Debit and Credit column totals.(Gilbertson 428)Key VocabWorksheet: a columnar accounting form used to summarize the general ledger information needed to prepare financial statementsTrial Balance: a proof of the equality of debits and credits in a general ledgerAdjustments: changes recorded on a worksheet to update general ledger accounts at the end of a fiscal periodBalance Sheet: a financial statement that reports assets, liabilities and owner's equity on a specific dateIncome Statement: a financial statement showing the revenue and expenses for a fiscal periodNet Income: the differences between total revenue and total expenses when total revenue is greater(net loss is the opposite)Fiscal period: the length of time for which a business summarizes and reports financial information(Gilbertson 152-165)Concepts InvolvedConsistent Reporting:Recording information each fiscal period the same way. For example, a company that reports the number of deliveries made one year and then reports the revenue made from those deliveries the next year is not being consistent about deliveries (Gilbertson 152). The adjustments have to be recorded the same way as the trial balance. Matching Expenses with Revenue:Through the use of adjustments, the expenses used to earn revenue are reported in the same fiscal period as the revenue earned and reported (Gilbertson 157). Adequate Disclosure:Information to understand a company's financial position is updated in the adjustment columns of a worksheet (Gilbertson 423).

Example: A Completed Worksheet(Gilbertson 153)Step 5Prepare Financial StatementsKey VocabComponent Percentage: the percentage relationship between one financial statement item and that total that includes that itemPercent should be rounded to the nearest tenthConcepts InvolvedAdequate Disclosure: Financial statements are prepared from information on the worksheet (Gilbertson 202).

Going Concern: The statements are prepared with the expectation that the business will remain in business.

Matching Expenses with Revenue: The revenue and the expenses associated with that revenue are recorded in the same fiscal period and are represented on an income statement (Gilbertson 182).

Materiality: According to Accounting Explained, materiality is helpful in determining which figures are to be reported on income statement and balance sheet and which one in the notes. It is also helpful in helping decide which items should appear as line items and which ones are aggregated with others (Materiality).Creating an Income Statement1. Begin by writing out the heading:

2.Then, write the section heading, Revenue:, on the first available row.3. Below the section heading, write Sales, and find the amount of sales and place it in the correct amount column. This amount can be found on the worksheet income statement columns. In the % of sales column, write 100. 4. Write out any other account related to revenue and there corresponding amounts and place in the correct amount column.5. After all of the revenue accounts, write the section heading Expenses: on the next available row.6. Write out all expense account names in the wider section of the income statement (indented) and their corresponding balances in the proper amount column. 7. Under all expenses, write Total Expenses, and add up all the expense amounts and place total in the proper amount column. 8. Lastly, on the last three lines, write the following and their amounts in the proper amount columns:Net Income before Federal Income Tax (Sales/Gross Profit on Sales - Total Expenses)Less Federal Income Tax Expense (This is found on the worksheet.)Net Income after Federal Income Tax. (Net Income before Federal Income Tax - Federal Income Tax Expense)

Net Income before Federal Income Tax % of Net Sales:Net Income before Federal Income Tax/Net SalesX100104203.19/4922773.24X100=21.2-(Gilbertson 452)Example: Merchandising BusinessCreating a Balance Sheet(Gilbertson 82-184 & 449-452)1. Begin by writing out the heading.2. Label the first row Assets. 3. List any asset account titles and their amounts in the proper amount column. Some companies will further divide assets into the following sub categories:Current AssetsAssets exchanged for cash or consumed within a year.Examples: Cash, Petty Cash, Accounts Receivable, etc...Plant AssetsAssets that will be used for a number of years in the operation of a businessExamples: Office Equipment and Store Equipment4. Total the asset amounts. A total should be calculated for both sub categories and a calculation including everything together. Single rule the full total.5. Write the title Liabilities on the next available row. 6. List any liability account and their amounts in the proper amount column. (A merchandising business will have the subtitle Current Liabilities.7. Single rule and total the liability amounts. Again, remember to use the single rule. 8. Write the title Owner's Equity (proprietorship) or Stockholder's Equity (merchandising business) on the next row.{Name of Company}Balance Sheet{Date}*A balance sheet reports information about the elements of the accounting equation (Assets= Liabilities + Owner's Equity).Example Balance Sheet: ProprietorshipExample Balance Sheet: Merchandising Business(Gilbertson 469)(Gilbertson 189)(Gilbertson 182-189 and 465-468)Steps to create a Statement of Stockholder's EquityStatement of Stockholder's Equity: a financial statement that shows changes in a corporation's ownership for a fiscal period1. Write the following heading: --------------->

2. Then, write the the following titles in the wider section and their amounts in the correctamount column:a. Capital Stock: This is the heading and has no amount.b. {$} Par Value: This will be given to you in the instructions.c. January 1, 2013, {#} Shares Issued: The number of shares issued will be in the instructions however, this is not the amount to be recorded. To figure out the amount to be recorded, multiply the par value by the number of shares. d. Issued during Current Year {#} Shares: The number of shares issued during the current year will be in the instructions. To find the amount to be record, multiply the number of shares issued during the current year by the par value. Place a single rule under this amount.e. Balance, December 31, {yyyy}, {#} of Shares Issued: The number of shares issued is the total of shares given to you in the instructions. The amount to be recorded is the total of both amounts previously recorded. {Company Name}Statement of Stockholder's EquityFor Year Ended December 31, 2013Importance: Financial statements are used to evaluate a company’s financial performance (What). (Gilbertson 461)Journalizing Adjusting & Closing EntriesKey VocabAdjusting Entries: journal entries recorded to update general ledger accounts at the end of a fiscal periodClosing Entries: journal entries used to prepare temporary accounts for a new fiscal periodPermanent Account: accounts used to accumulate information from one fiscal period to the nextTemporary Accounts: accounts used to accumulate information until it is transferred to the owner's capital accountConcepts InvolvedAccounting Period Cycle- Adjustments are updated to a journal before the end of every fiscal period.Matching Expenses with Revenue- At the end of a fiscal period, the temporary accounts are closed to prepare the general ledger for the next fiscal period (Gilbertson 487).Steps to Record Adjusting Entries1. Write the heading, Adjusting Entries, in the middle of the account titles column of a new journal page. (If you're using special journals, do the same procedure in the general journal.)2. Write the date in the date column.3. Scan down the Adjustments column of the worksheet and find both (a) amounts.4. Write the debited account in the journal first followed by the credited account. The credited amount should be indented compared to the debited amount. *There is no source document for these entries.5. Record the adjustment amounts for each account.6. Repeat these steps until all adjustments are recorded.Example: Adjusting Entry for SuppliesWorksheetJournal(Gilbertson 202)Steps to Creating Closing Entries(Gilbertson 202 & 206)**The income summary account, unlike other accounts, does not have a normal balance. When the account has a credit balance, then you have a net income. Meanwhile, if the account has a debit balance, then you have a net loss.

DebitTotal ExpensesIncome SummaryCreditRevenue1. Write the heading, Closing Entries, in the middle of the journal page's Account Title column on a new page. For these entries, there are no document numbers.2. Identify the income statement accounts on the trial balance that have a credit balance. Write the date and these account titles on the journal page following Closing Entries.These accounts include Sales, and contra cost accounts like Purchases Discount and Purchases Returns and Allowances .3. Because you want these account to have a balance of zero for the next fiscal period, eachaccount is to be debited for the amount of their balance.

Steps to Creating Closing Entries Cont.9. The next step is to record net income/loss and close Income Summary for the next fiscal period. Begin by writing out the date on the journal.On the worksheet, look for the net income/loss debit/credit amount. This amount is used to close Income Summary.Net Income- debit Income SummaryNet loss- credit Income SummaryThe account used to close Income Summary is the account, {Name}, Capital.10. Record Account titles and the net income/loss amount to close Income Summary. The account debited will be first!11. The last entry is to close the Owner's Drawing account.On the worksheet, look for the account {Name}, Drawing and make note of the amount associated with it.12. Write the date in the date column and the acounts {Name}, Capital and {Name}, Drawing under Account Title on the journal page13. Because the drawing account has a debit balance and is a temporary account, you will want to credit the account to reduce it to zero.14. The money is transferred over to the {Name}, Capital

account, so on the journal page the account is to be debited.(Gilbertson 208-209 and 288-289)Steps 1-8 are the same for both a Proprietorship and a Merchandising Business**The remaining steps vary depending if the business is a Proprietorship or a Merchandising Business.Remaining Steps of a Proprietorship:Remaining Steps of a Merchandising Business:9. The next step is to calculate the balance of the Income Summary account. Debit balance = Net lossCredit balance = net income**Because Income Summary is a temporary account, the amount is to be reduced to zero. The account associated with this action is Retained Earnings.10. Begin by writing the date on the next row of the journal. 11. Debit/credit the accounts Income Summary and Retained Earnings with the Income Summary account balance calculated in step 9. Write account title first and the account's amount in the debit/credit amount columns. (debited accounts always come first!)*In the case you have a net income: debit Income Summary & credit Retained Earnings*In the case you have a net loss: debit Retained Earnings & credit Income Summary12. Close the account Dividends by transferring the money to the account Retained Earnings.13. Begin by writing the date and the account titles Retained Earnings and Dividends in the account title column of the journal.14. Lastly, debit Retained Earnings with the amount of Dividends

(found on worksheet), and credit Dividends. This will reduce Dividends to zero and is ready for the next fiscal period.(Gilbertson 491)(Gilbertson 210 & 211)Sample of Journalizing EntriesAccounts used: Expense Accounts and Income SummaryBecause the expense accounts are debits on the worksheet, in order to reduce their accounts to zero, you credit them.+Then, you add all of the expense accounts together and transfer this amount to the Income Summary Debit. This zeros out the expense accounts.2013Dec.DateStep 7Post Adjusting & Closing EntriesSteps to Posting Adjusting & Closing Entries1. Beginning with the first entry, locate the entry's ledger by looking at the account title. 2. Write the date of the entry on the ledger under the date column.3. Write the journal page number and type in the Post. Ref. column of the ledger.4. Take the amount journalized to the account and place into the debit or credit amounts respectfully.5. Write the new account balance in the balance sheet column. The balance debit/credit depends on the normal balance of the account.a debit and a debit/credit and a credit; you adda debit and a credit/credit and a debit; you subtractIf an account has a zero balance, draw a line through the Balance Debit and Credit columns6. Return to the journal and write the account number associated with the ledger in the Post Ref. column of the journal.Repeat until all adjusting and closing entries are posted. The following accounts will close- recall from earlier that these are temporary accounts:(Gilbertson 97)In a proprietorship:{Name}, DrawingIncome SummarySalesAll expenses(Gilbertson 214-215)In a merchandising business:DividendsIncome SummarySalesSales DiscountSales Ret. & AllowPurchases

2. List all general ledger accounts that have balances in the Account Title Column.3. Based off the general ledger accounts, write the debit/credit account balances in the debit/credit columns of the post-closing trial balance respectively with their account titles.4. Rule a single line under the last account's amount.5. Add each debit/credit column.6. On the next available line, write the word Totals.7. Write the totals to each debit/credit columns.8. Compare totals from step 5, these totals must be the same. 9. If the totals you calculated are equal, rule double lines across both amount columns to show that the totals are verified as correct.

{Company Name}Post-Closing Trial Balance{Date}Example of a Completed Post-Closing Trial Balance**Note: Ledger accounts that have a zero balance do not appear on a post-closing trial balance. (Gilbertson 216)(Gilbertson 216)Ashley BoltzAccounting 1Period 2Due: 8 Dec. 2014Importance: Accountants must analyze each transaction to determine how it affects owner's equity and the different types of assets and liabilities before recording the transaction (Analyzing).Concepts 1. Understand the accounting equationSteps to Analyzing Transactions Cont.Asset accounts include things like cash, prepaid insurance, account receivable, and supplies. Liability accounts include any account payable.Asset & Liability T-Accounts:3. Given the amount in the transaction, determine how the amount is treated in each account- if it increases or decreases the account. Lastly, place this value into the corresponding debit and credit parts of each t-account.4. Verify that your accounting equation is still balanced.v. Once added, one should add up debits and credits on a separate sheet of paper. The sum of the totals for each debit and credit MUST equal! If they're equal place a double line below the totals. By doing so, your indicating that the amounts are totals and the the sum of debits equals the sum of credits. (This is the last step of situation B.)vi. To continue a page, as needed in situation A, open a new page by writing the next page number in the upper right hand corner. Then, using the date from the last entry, write out the date in the Date column (dd/mm/yyyy).vii. In the first row where you just wrote the date, copy over the totals from the previous page into their corresponding columns and write Brought Forward for the account title. There should also be a check mark placed in the Post. Ref. column. viii. Continue to journalize entries until all transactions are recorded. Once you have no more transactions to be written down, reference step ii and follow through with the final steps.7. Proving and Ruling a Journal Page Cont.-----------------------------------------------------(Gilbertson 160C)subtractsubtractequalsequalsadd

addequalsequalsMust EqualMust EqualMust EqualMust EqualMust Equalextended to the Balance Sheet columnextended to the Income Statement column{Company Name}Income StatementFor {Fiscal Period} Ended, {mm/dd/yyy}9. Record titles and amounts associated with each in the proper amount column.Under Owner's Equity, record and title the amount for {Name}, Capital.Under Stockholder's Equity, record and title the amount for Capital Stock and Retained Earnings.Single rule and total these two amounts together and write Total Stockholder's Equity in the wider column.10. Single rule and Total Liabilities and Total Owner's Equity/Stockholder's Equity

amounts together. Label the next available row Total Liabilities and Owner's Equity/Total Liabilities and Stockholder's Equity and place this total in the proper amount column11. Lastly, compare the Total Liabilities and Owner's Equity/Total Liabilities and Stockholder's Equity with Total Assets. These two accounts must match! Once matched, double rule both of these accounts.

Creating a Balance Sheet Cont.must matchmust matchSteps to create a Statement of Stockholder's Equity Cont.Shares X Value=------->Shares X Par Value-->+The Capital Stock SectionThe Retained Earnings Section*b-e titles are to be indented Write the following titles in the wider section of the financial statement along with their amounts in the proper amount column.1. Retained Earnings: no amount is to be recorded for this2. Balance, January 1, 2013: the amount is from the Balance Sheet Credit column3. Net Income After Federal Income Tax for {yyyy}: This is from the Income Statement Debit column.4. Less Dividends Declared during {yyyy}: This is found under the account title Dividends in the Balance Sheet Debit column. Draw a single rule under this account.5. Net Increase during {yyyy}: This is the difference between step 3 and 4. Draw another single rule under this difference. 6. Balance, December 31, {yyyy}: This is the total of step 2 and step 5. Place a single rule underneath this sum.7. Total Stockholder's Equity, December 31, {yyyy}: This is the total from Balance, December 31, {yyyy} # Shares Issued (found under the capital stock section) and the total from step 6. 8. Draw a double rule across all three amount columns under the amount written from step 7. *2-6: titles are to be indented(Gilbertson 462)4. The account that the amount is transferred to is known as Income Summary. This account is to be credited the total amount of the revenue accounts credited.5. The next step is to identify the income statement accounts on the trial balance that have a debit balance. These accounts include expense accounts, Purchases, and contra revenue accounts like Sales Discount and Sales Returns and Allowances.6. On the journal, write the date and Income Summary in the Account Title column, followed by the income statement accounts identified in step 5. 7. Once again, you want these income statement accounts to have a balance of zero. To do this, you want to credit their account amounts on the journal since they have a debit balance.8. The money is transferred to the Income Summary account. Find the total of the credited income statement accounts and debit this amount to the Income Summary account.

Steps to Creating Closing EntriesCont.Concepts InvolvedRealization of Revenue: When goods and services are sold, a journal entry is recorded regardless if money is received (Gilbertson 271).Historical Cost: The actual amount paid for an item is recorded instead of the items value (Gilbertson 236). For example, a car could be valued at $25,000 but be sold for only $20,000. The historical cost of the car is what it was sold for- $20,000. Objective Evidence: The source document number is placed in the Post. Ref. column of a journal. This shows where the amounts originated from and, it also proves that the transaction did occur (Gilbertson 57).